Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

GEONG (AIM:GNG) – another unexpected announcement gives the share price a boost but doubts remain

The China based provider of software solutions issued a somewhat confusing update on both trading and a proposed acquisition. Despite the evident growth prospects we have had our doubts about the long term viability of this business for sometime, with cash generation our biggest concern. Today’s update serves up more mixed messages.

Geong announced back in July that it had entered into an agreement to acquire Hong Kong based company Adbeyond for up to £9.6m, to be satisfied very specifically 50% in shares and 50% in cash. At the same time it also announced that it entered into a ‘non-binding term sheet’ with one of its major Chinese customers to raise a further US$8m by way of an issuance of a two-year 7.5% convertible secured loan stock. Despite all indications that its customers were reluctant payers in the normal course of business, the suggestion was that a large customer was happy to advance larger sums under a ‘formal’ convertible arrangement – unusual to say the least.

We now learn that after four months of negotiation and “in the light of the continuing instability in the financial markets” management concluded that it would not be in the best interests of “either party” to conclude the acquisition. The comment that Geong remains in discussion with the vendors of Adbeyond concerning the terms of the termination and that a further announcement will be made in respect of this suggests to us that there could be financial implications implying that both parties were not necessarily of the same mind.

The US$8 million convertible loan stock is therefore not now required.

They remain committed to seeking acquisitions in Greater China although it’s hard to see how these will be financed as management has also conceded.

On a more positive note they have reported that trading in the half year just completed (period to end September 2011?) has been better than in the same period last year. For the first half of 2010 turnover was £4.7m and pre-tax profit £0.7m but more worryingly there was also a £2m operating cash outflow, so if the last of these is better it will indeed be good news. They also reported that net investment in working capital is expected to reduce in the current financial year, reflecting the increasing proportion of shorter term contracts.

It’s the usual story with a strong order book although surely that’s irrelevant if your customers don’t pay you!

Full year results are expected to in line with expectations which currently suggest pre-tax profit of £3m and earnings per share of 6.3p. On this basis, with the shares trading at less than 4x estimates they do look dirt cheap, however long term growth (even survival) surely remains all about effective cash management.


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